3 Factors to Consider Before Moving to Florida
Considering a move to Florida? The experts weigh in on three things to consider when contemplating a residency change.
It’s no secret that since the start of the pandemic many are opting to leave big cities and more densely populated areas like New York City in favor of destinations with warmer climates and lower taxes like Florida. While a move like this may have originally started off as a temporary stay during quarantine, many are now considering a permanent move. Establishing residency for tax purposes in a new state has been a popular inquiry from our clients and is an area where we have developed proficiency. In working with our clients, we have found it helpful to point out three important considerations:
- Changing your domicile for tax purposes may not be so simple if you maintain your original residence.
- State sourcing of business income may still subject you to state income taxes.
- Property values and regular living expenses have trended higher in the destination states like Florida.
Each situation and the pros and cons of a residency switch must be valued on a case-by-case basis, and it is important to understand the details of each of these aspects.
CHANGING YOUR DOMICILE
It’s often assumed that spending more than half the year—or 183 days—in a state equates to an automatic residency change, but that is not the case if you continue to own a home in the state that you are leaving. You will likely also need to prove that you have abandoned your domicile.
Abandoning one’s domicile—or one’s permanent, primary home—and establishing a new one generally depends on facts and circumstances and may be state-specific. Auditors are likely to look at a range of factors including state-issued driver’s license, voting registration and participation, location of bank accounts, etc. These investigations can get quite personal and can look at where family, social ties and business relationships exist in addition to the amount of time physically spent in the state. We’ve even had clients field questions about where they keep heirlooms and other sentimental items, and even FaceTime with an auditor to prove that they kept family photos in their new residence. Phone records, credit card statements and other documents that show where a person spends time are all fair game. States experiencing an exodus are very aggressive in auditing those that move, so it’s important to be aware of the states’ domicile and residency requirements—and be prepared to produce evidence—when contemplating a move.
STATE SOURCING OF BUSINESS INCOME
It is a surprise to many business owners that relocating to a state with no income tax may not actually save them any taxes at all. The sourcing of business income is based on many factors and can vary by state, and can also vary by the entity structure of the business (e.g., S Corp or LLC) or even the specific industry in which the business operates.
For example, service businesses operating in a cost-of-performance state are generally required to source income to the location where the services are performed, while service businesses operating in a market-based sourcing state are generally required to source income to the location of their customers.
It is important to consider the impact of state sourcing when evaluating the tax benefits of a residency change.
TRENDS IN PROPERTY VALUES AND THE COST OF LIVING
Though an interstate move could mean saving on income taxes, taxpayers should also pay attention to other financial considerations such as trends in property values and the cost of living. Some areas in Florida, for instance, have seen property values skyrocket, as homebuyers from big cities and metropolitan areas in the Northeast began to move in.
Home values across the board in Florida, for one, have been on the rise as demand has increased. According to RedFin, sales of luxury homes increased by 41.6% in Q1 of 2021 versus the same quarter last year. The median sales prices of luxury homes have increased by 14.7% in Q1 2021.
With a growing population and increasing property values, it seems likely that property taxes and other increases to regular living expenses will follow suit. It is important to consider all of the financial implications of a move.
Overall, nationwide movement trends indicate that Americans are leaving high-tax states like New York, California, Connecticut and New Jersey for states where income taxes are typically lower. As United Van Lines’ 2020 National Movers Study found, the top 10 states for inbound moves last year were Idaho, South Carolina, Oregon, South Dakota, Arizona, North Carolina, Tennessee, Alabama, Florida and Arkansas.
In any case, there are many factors to consider when thinking through a residency change, and talking through the options with a financial adviser with experience is a great place to start.
Click here to view the article in Hamptons magazine.
Frank Marzano, CFP®, CPA, is the founder and managing principal of GM Advisory Group (GMAG) and its affiliates. Christopher Castellano, CFP®, CPA, is the director of wealth strategies. GMAG provides a range of wealth management services to individuals, family offices and businesses. GMAG oversees over $5 billion in assets under management and advisement for over 500 clients.
GMAG, a registered investment adviser, does not provide tax, legal or accounting advice. This material is not intended to replace the advice of a qualified tax adviser, attorney or accountant.